CHAPTER 1. INTRODUCTION TO ACCOUNTING
And because it follows certain standards and
“Is accounting important to you?”
“Accounting is the process of IDENTIFYING, RECORDING, and
COMMUNICATING economic events of an organization to interested
users.” (Weygandt, J. et. al)
Defining ACCOUNTING:
IDENTIFYING – this involves selecting economic events that are relevant
to a particular business transaction
The economic events of an organization are referred to as transactions.
Examples of economic events or transactions - In a bakery business:
• sales of bread and other bakery products
• purchases of flour that will be used for baking
• purchases of trucks needed to deliver the products
RECORDING – this involves keeping a chronological diary of events that
are measured in pesos. The diary referred to in the definition are the
journals and ledgers which will be discussed in future chapters.
COMMUNICATING – occurs through the preparation and distribution of
financial and other accounting reports.
THE NATURE OF ACCOUNTING
According to Accounting Theory
(http://accountingtheory.weebly.com/nature-and-scope-of-
accounting.html):
“Accounting is a systematic recording of financial transactions and the
presentation of the related information to appropriate persons.”
BASIC FEATURES OF ACCOUNTING:
• Accounting is a service activity. Accounting provides assistance to
decision makers by providing them financial reports that will guide them in
coming up with sound decisions.
• Accounting is a process: A process refers to the method of performing
any specific job step by step according to the objectives or targets.
Accounting is identified as a process, as it performs the specific task of
collecting, processing and communicating financial information. In doing so,
it follows some definite steps like the collection, recording, classification,
summarization, finalization, and reporting of financial data.
• Accounting is both an art and a discipline. Accounting is the art of
recording, classifying, summarizing and finalizing financial data. The word
‘art’ refers to the way something is performed. It is behavioral knowledge
involving a certain creativity and skill to help us attain some specific
objectives. Accounting is a systematic method consisting of definite
techniques and its proper application requires skill and expertise. So by
FUNDAMENTALS OF ABM 1 – INTRODUCTION TO ACCOUNTING
nature, accounting is an art.
professional ethics, it is also a discipline.
• Accounting deals with financial information and transactions:
Accounting records financial transactions and data, classifies these and
finalizes their results given for a specified period of time, as needed by their
users. At every stage, from start to finish, accounting deals with financial
information and financial information only. It does not deal with non-
monetary or non-financial aspects of such information.
• Accounting is an information system: Accounting is recognized and
characterized as a storehouse of information. As a service function, it
collects processes and communicates financial information of any entity.
This discipline of knowledge has evolved to meet the need for financial
information as required by various interested groups.
THE FUNCTION OF ACCOUNTING IN BUSINESS
Q: Why accounting is considered as the language of business?
ACCOUNTING is the means by which business information is
communicated to business owners and stakeholders. The role of accounting
in business is to provide information for managers and owners to use in
operating the business. In addition, accounting information allows business
owners to assess the efficiency and effectiveness of their business
operations. Prepared accounting reports can be compared with industry
standards or to a leading competitor to determine how the business is doing.
Business owners may also use historical financial accounting statements to
create trends for analyzing and forecasting future sales. Accounting helps
the users of these financial reports to see the true picture of the business in
financial terms. In order for a business to survive, it is important that a
business owner or manager be well-informed.
Activity: The function of accounting in business
Mr. Juan is a retired government employee who is good at baking. One day
he decides to put up a bakery shop in your barangay. He renovates a portion
of his house to serve as the area for the production of bread. He purchases
baking equipment and raw materials to produce five different types of bread.
Mr. Juan also hires Jose to help him with the baking and, at the same time,
to be in-charge of sales. Mr. Juan pays Jose on a weekly basis. Every day,
Mr. Juan’s wife deposits the daily cash sales in their bank account at XY
Savings Bank. With the help of accounting, what possible decisions or
questions of Mr. Juan can accounting provide an answer to?
THE HISTORY OF ACCOUNTING
Accounting is as old as civilization itself. It has evolved in response to
various social and economic needs of men. Accounting started as a simple
recording of repetitive exchanges. The history of accounting is often seen
as indistinguishable from the history of finance and business.
Following is the evolution of accounting:
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• THE CRADLE OF CIVILIZATION • THE PRESENT - THE DEVELOPMENT OF MODERN ACCOUNTING
Around 3600 B.C., record-keeping was already common from Mesopotamia, STANDARDS AND COMMERCE
China and India to Central and South America. The oldest evidence of this The accounting profession in the 20th century developed around state
practice was the “clay tablet” of Mesopotamia which dealt with commercial requirements for financial statement audits. Beyond the industry's self-
transactions at the time such as listing of accounts receivable and accounts regulation, the government also sets accounting standards, through laws
payable. and agencies such as the Securities and Exchange Commission (SEC). As
economies worldwide continued to globalize, accounting regulatory bodies
• 14TH CENTURY - DOUBLE-ENTRY BOOKKEEPING required accounting practitioners to observe International Accounting
The most important event in accounting history is generally considered to Standards. This is to assure transparency and reliability, and to obtain
be the dissemination of double entry bookkeeping by Luca Pacioli (‘The greater confidence on accounting information used by global investors.
Father of Accounting’) in 14th century Italy. Pacioli was much revered in his Nowadays, investors seek investment opportunities all over the world. To
day, and was a friend and contemporary of Leonardo da Vinci. The Italians remain competitive, businesses everywhere feel the need to operate
of the 14th to 16th centuries are widely acknowledged as the fathers of globally. The trend now for accounting professionals is to observe one single
modern accounting and were the first to commonly use Arabic numerals, set of global accounting standards in order to have greater transparency
rather than Roman, for tracking business accounts. Luca Pacioli wrote and comparability of financial data across borders.
Summa de Arithmetica, the first book published that contained a detailed
chapter on double-entry bookkeeping. PRACTICE
Divide the class into 2 groups. The first group will act out the definition of
• FRENCH REVOLUTION (1700S) accounting while the second group will act out the evolution/history of
The thorough study of accounting and development of accounting theory accounting.
began during this period. Social upheavals affecting government, finances,
laws, customs and business had greatly influenced the development of
accounting. ENRICHMENT
Answer the questions: Is accounting important to you? Does it affect your
• THE INDUSTRIAL REVOLUTION (1760-1830) daily activities? How?
Mass production and the great importance of fixed assets were given
attention during this period. EVALUATION
Quiz.
• 19TH CENTURY – THE BEGINNINGS OF MODERN ACCOUNTING IN 1. Define accounting
EUROPE AND AMERICA 2. Give examples of decisions or questions that can be supported by
The modern, formal accounting profession emerged in Scotland in 1854 accounting information.
when Queen Victoria granted a Royal Charter to the Institute of
Accountants in Glasgow, creating the profession of the Chartered
Accountant (CA). In the late 1800s, chartered accountants from Scotland
and Britain came to the U.S. to audit British investments. Some of these
accountants stayed in the U.S., setting up accounting practices and
becoming the origins of several U.S. accounting firms. The first national U.S.
accounting society was set up in 1887. The American Association of Public
Accountants was the forerunner to the current American Institute of
Certified Public Accountants (AICPA). In this period rapid changes in
accounting practice and reports were made. Accounting standards to be
observed by accounting professionals were promulgated. Notable practices
such as mergers, acquisitions and growth of multinational corporations were
developed. A merger is when one company takes over all the operations of
another business entity resulting in the dissolution of another business.
Businesses expanded by acquiring other companies. These types of
transactions have challenged accounting professionals to develop new
standards that will address accounting issues related to these business
combinations.

FUNDAMENTALS OF ABM 1 – INTRODUCTION TO ACCOUNTING ecbmalana